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Tuesday, March 25, 2014

Earlier today, Facebook announced that it had acquired virtual reality headset maker Oculus VR for $2 billion, in the form of $400 million in cash and 23.1 million shares of Facebook common stock worth $1.6 billion. Oculus VR's shareholders could earn an additional $300 million based on achieving several unspecified performance objectives. Oculus started with a Kickstarter campaign in 2012 that raised $2.4 million; last year, the company closed A and B rounds worth a total of about $93 million.

Ever since the announcement, comments about Oculus's acquisition have been flying around the Internet. The general tone is that Facebook will destroy Oculus's independence and load its software up with links to Facebook content. Some game developers have gone so far as to say that they've either stopped or won't begin software development for the Oculus Rift. My take is that Facebook's acquisition will be good for Oculus and its third-party developers, although a few years down the road, Oculus's shareholders may wish that they had kept ownership of the company.

But first, why did Facebook acquire Oculus? Facebook's not a hardware company, and when it's tried to specify smartphone hardware or design smartphone user interfaces, it's come up short. It'll take years for Oculus to become a meaningful generator of revenues and profits for Facebook, if it ever does. However, Facebook believes that VR is the next big hardware platform after mobile devices. VR is Facebook's "blue ocean," an undeveloped market opportunity that could be the basis of tens of billions of dollars in revenues. And, Facebook is buying the recognized market and technology leader: Even though there have been VR devices for almost two decades, the Oculus Rift is the first device that can truly begin to exploit virtual reality without all the physical discomfort that's come to characterize VR systems. As I've written previously, Oculus is six months to a year ahead of Sony and other VR headset manufacturers. And, Oculus is already generating revenue: Some 75,000 developers kits have been sold, at $300 each. Most other VR developers have only dozens or a few hundred developers working on their platforms.

As for Oculus and its shareholders, Facebook's $2 billion represents a nice return on their investments (Spark Capital and Matrix Partners are said by Bloomberg.com to both have received a 20-times return on investments made from a year to just a few months ago,) although I believe that if Oculus had remained independent and had become successful, the company's valuation would have easily been ten times what Facebook paid. However, Facebook brings to Oculus enormous financial resources. The company will be able to expand its development facilities and hire more aggressively. It will also have more influence on component manufacturers, because Oculus will be able to commit to much bigger purchase quantities and bigger non-recurring engineering costs than it could before Facebook. This is critical, because Oculus doesn't have the ability to build its own displays, camera and sensors, and some of the components it needs simply aren't yet available as off-the-shelf products.

Oculus's hardware development is likely to dovetail nicely with Facebook's rapid software development philosophy. At Sony's announcement of its "Project Morpheus" at GDC, the company said that it's been working on VR longer than Oculus, but most observers would agree that Oculus is still significantly ahead of Sony. The combination of Oculus and Facebook should be able to iterate hardware and software faster than Sony (and most other big companies) can even imagine. So, Oculus will most likely be able to get its first consumer version of the Oculus Rift out faster, and possibly at lower cost, with Facebook's backing.

The problem isn't that Facebook is going (to) ruin Oculus, by plastering it with ads and making it a pain in the ass like everything else they've shat all over. Although that wouldn't be a surprise. The problem is that this was an opportunity for something different. And it just died.

I don't think that the acquisition is as "soul crushing" as Putney believes; Facebook has said that Oculus will be run independently, and its offices will likely remain in Orange County, at least for a while. In addition, we're unlikely to see the consumer version of the Oculus Rift until next year, and that gives competitors an opportunity to catch up. However, paradoxically, the same funding that makes the Oculus Rift less risky as a development platform increases the risk that Facebook will turn it into a platform that you wouldn't want to develop for. I don't have a good counterargument to give to the people who believe that Facebook will "shit all over" Oculus, other than you should be okay if you develop for multiple headsets, not just the Oculus Rift.